In a recent note to clients, the bank said investors are reaching “maximum optimism.”
Moreover, Goldman’s team of top market prognosticators said that this maxed-out optimism will lead to a pullback in stocks later this year.
In its note released earlier this week, the company affirmed its somewhat-downbeat prediction for where the S&P 500 will end the year.
Goldman said the broad-based measure of the domestic equity markets could add another 2% from current levels, but then will likely fall 4%.
That puts the S&P 500 at about 2,300 to finish out the year.
Now, considering the S&P currently trades at 2,363, we are talking about a market that’s nearly 3% above where it will be in 10 months.
Maximum optimism, indeed.
Well, for the same reasons I and others have cited repeatedly. That is, this market optimism has been built almost entirely on hope. So, why does Goldman seem so unimpressed with the post-election rally?
The hope is that President Trump and the Republican Congress can pass sweeping regulatory reform, fiscal stimulus, Obamacare repeal/replace … and most of all, corporate tax reform.
If all of that were to pass, then the hope is we would see the kind of GDP required to pump up economic growth.
Now, that hope could turn into reality … but it also may turn into just a shattered dream.
Here’s how a recent article at CNBC.com reported on the Goldman note:
Investors have grown too confident that tax cuts and other initiatives from President Donald Trump’s administration will have a major impact on business, Goldman told clients this week. Once investors realize that policy changes won’t be felt quickly, the strategists said, markets will have to adjust.
“Financial market reconciliation lies ahead,” said David Kostin, Goldman’s chief U.S. equity strategist. “We are approaching the point of maximum optimism and the S&P 500 will give back recent gains as investors embrace the reality that tax reform is likely to provide a smaller, later tailwind to corporate earnings than originally expected.”
There you have it … a “smaller, later tailwind” is not what this market wants.
It’s certainly not the stuff of roaring bull markets, or a double-digit percentage gain like we saw from the S&P 500 since Nov. 8.
It’s also not justification for a broad-market index that trades at a very high multiple of 18.4X current-year earnings. (The earnings-per-share estimate on the S&P 500 is $128.00, with the current S&P 500 price near 2,360.)
|The S&P 500 has the highest forward 12-month P/E ratio since 2004. Source: FactSet Insight|
On the earnings front, Kostin and the Goldman team’s note also explained that, while corporate earnings estimates for 2017 have fallen by 1% since Election Day, the S&P has spiked 10%.
Something has to give, according to Goldman. In their view, what’s going to give is the gains in this market.
Finally, Kostin sees a dichotomy between investor hopes and the reality on the ground. He describes using the psychology buzzword “cognitive dissonance.”
Per the CNBC piece:
“On the one hand, investors, corporate managers, and macroeconomic survey data suggest an increase in optimism about future economic growth,” he said. “In contrast, sell-side analysts have cut consensus [full-year] adjusted [earnings per share] forecasts by 1 percent since the election and ‘hard’ macroeconomic data show only modest improvement.”
Goldman sees the reality on the ground as being disconnected from investor expectations … and that’s usually a recipe for investor disillusionment. (Hey, I can use psychological buzzwords, too!)
The SPDR S&P 500 ETF Trust (NYSE:SPY) fell $0.79 (-0.33%) in premarket trading Friday. Year-to-date, SPY has gained 5.78%, versus a % rise in the benchmark S&P 500 index during the same period.
This article is brought to you courtesy of Uncommon Wisdom Daily.